Annual inflation, based on the wholesale price index, increased to 7.55 percent from 6.87 percent in July, the Ministry of Commerce and Industry said Friday. Economists had forecast a rate of 7.1 percent.

Despite strong opposition, even from some its allies, the Congress Party-led coalition government raised diesel prices by about 14 percent yesterday, aiming to bring the budget deficit to 5.1 percent of the gross domestic product. The cabinet members also limited the supply of subsidized cooking gas for each buyer.

Persistently high inflation and weak currency exchange rate are holding back the Reserve Bank of India from easing monetary policy. The central bank has been seeking tough action from the government to rein the fiscal deficit.

At the next policy announcement on September 18, the bank is widely expected to retain its repo rate unchanged at 8 percent and the reverse repo at 7 percent.

Prices of primary articles rose 10.08 percent annually, with prices of food articles gaining 9.14 percent. Prices of non-food products were higher by 13.75 percent compared to last year. Fuel and power prices climbed 8.32 percent, much faster than the 5.98 percent increase in July.

Month-on-month, the wholesale price index moved up 1.09 percent in August, the ministry said.

The Indian economy expanded 5.5 percent in the June quarter, after a 5.3 percent expansion in the preceding three months.

The central bank expects the economy to grow 6.5 percent in 2012-13. The RBI's estimate is too optimistic compared to the forecast of banks and brokerage firms.

Citigroup and CLSA downgraded their view of the country's growth for the current fiscal year to 5.4 percent and 5.5 percent, respectively. Morgan Stanley cut its growth forecast for the fiscal year ending March 2013 to 5.1 percent from 5.8 percent, citing weak external demand as well as low private investment.